AAPL Actively Moving To Taiwan Semi, Says Bernstein, But It’ll Take Time

By Tiernan Ray

Bernstein Research’s Mark Li, Mark Newman, and Stacy Rasgon this morning author a combined report on what happens to chip makers and semiconductor foundries with respect to Apple‘s (AAPL) supposed intention to move away from Samsung Electronics (005930KS) as its foundry partner for the application processors it uses in its iPhone, iPad, and iPod Touch and instead use the services of Taiwan Semiconductor Manufacturing (TSM) or Intel (INTC).

The authors write that “How Apple deals with its application processor business with Samsung and the ramifications on TSMC, Intel, etc, is indeed one of the most popular questions that we get from investors,” and that, in fact, “We believe Apple is actively moving its application processor business away from Samsung but it takes time.”

Apps processors, unlike memory and panels and other parts, are “fairly sticky,” they write, which makes it hard to just shift suppliers.

Nonetheless, Apple is taking steps to prepare for the move. The fact that Apple designs its own core (instead of using one from ARM) in its latest processor, A6, in iPhone 5 shows its commitment to processor design. We believe Apple is strengthening its design capability, which in turn prepares it for the general foundry model that TSMC provides.Given the difference in “gate-first” and “gate-last” in 32/28nm, we think the move most likely will happen in 22/20nm in which Samsung and TSMC will both converge to “gate-last.” As TSMC’s 20nm is not going to enter mass production until late 2013, it will be too late for “A7″ which needs to be produced with large volume by mid-2013 to be in time for the launch of Apple’s next version of iPhone/iPad in late We therefore argue the move will begin in late 2013 but probably with limited volume for less critical products (e.g. Apple TV). Meaningful production at TSMC wouldn’t happen until 2014.

As for Intel, the authors think the “likelihood is virtually non-existent that Apple would move to x86,” though there is potential for Intel to supply foundry services, but low probability:

It is conceivable that Intel could drive some benefits from such “strategic” foundry relationship with Apple, but there are serious strategic issues around a potential Intel/Apple foundry partnership, as well as a significantly lower ROIC implying Intel would have to believe they could not invest capital in a more accretive fashion in their own core business. If they can get past the strategic issues, our analysis suggests that the overall economics from Intel/Apple foundry relationship could be favorable; lower gross margins can likely be offset by a lower opex burden. Additionally, (given Apple’s likely volume) EPS accretion in such relationship could be reasonably material. However, should Intel choose to enter into a strategic, we believe such an entry would not be seen prior to at least 2015.

Bernstein has a Market Perform rating on Taiwan Semiconductor, an Outperform rating on Samsung, and Rasgon just last night cut his rating on Intel to Sell.

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There are 4 comments

OCTOBER 9, 2012 11:24 A.M.

Martin wrote:

"As for Intel, the authors think the “likelihood is vertically non-existent that Apple..."

Correction: "vertically" should be changed to "virtually"

OCTOBER 9, 2012 11:26 A.M.

Tiernan Ray wrote:

Martin: Yes, thank you for pointing out the error.

OCTOBER 9, 2012 11:42 A.M.

Principle wrote:

The Apple A6 uses ARM cores that Apple just tweaked, so they are not Apple cores, and the rest of it is from an intelectual property library at the foundry, Samsung. Samsung being able to produce it is usually more difficult than designing a SOC. And credit to VMware for the GPU cores that rock. Its hardly an Apple processor, they just bundled the IP together, which is nothing special.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.